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India vulnerable to oil price and capital inflow shocks: YV Reddy

According to the former Reserve Bank of India governor, there are three economic challenges- climate change, demographic divergence and technology - which are global and can be resolved only through cooperation and concerted action on the part of ...

, ET Bureau|
Updated: Nov 20, 2019, 11.28 AM IST
YV Reddy
There is, as yet, no agreement on managing the migration that is inevitable. Capital is global but labour is national, the former governor of Reserve Bank said.
Hyderabad: India is turning vulnerable to two potential short-term global shocks of oil and capital flows emanating from uncertain global geopolitics, said former Reserve Bank of India governor YV Reddy, referring to the recent developments around China, Iran and Middle East.

Reddy was addressing a two-day leadership conclave of economists organised by the Institute for Advanced Studies in Complex Choices (IASCC) in association with XLRI Jamshedpur in Hyderabad on Tuesday.

On the growing global trade wars, the former RBI governor said China dominates global trade in goods and gained considerable entry into services as well. “There is a divergence between global trade dominated by China and global finance and money dominated by USA. This is one source of conflict.”

Reddy said a new bi-polar world was emerging with the US and China leading each block with close economic integration within the block that complicated the fight for supremacy now underway.

Comparing the US-China trade wars with the faction politics in Andhra’s Rayalaseema region, from where he hails, Reddy said, “Two landlords fight each other till the other challenges and the moment the other challenges, they die together. So therefore, in the new bi-polar world, the rest of the world is at the mercy of the two – US and China.”

While war could be a possible outcome of uncertain global geopolitics, Reddy said technological developments may result in global giants providing an alternative world that would influence or overtake the existing political institutions. He was not sure if good sense would prevail and multilateralism will be re-established, though it is one of the three possible outcomes of the current uncertain global geopolitics.

“India is increasingly influenced by the global developments and India also contributes to the global developments more than in the past,” said Reddy. “In a way, therefore, all choices should take into account the global context.”

Reddy said quite a bit of net capital outflows from developing countries is from China and is all denominated in Chinese currency and the contracts are not that transparent. “With the result, the assessment of debt sustainability of many developing countries has become difficult. Therefore, we have got a global order where even IMF and World Bank are not sure as to what is the debt sustainability of many of the developing countries.”

On global finances, Reddy said, “It is in transition to nowhere. Finance has become global but the regulation continues to be national.”

Global finance is supposed to be market-based but it is essentially in currency and we have a few giants controlling the global system. “The assumption that global finance is driven by market forces has to be taken with a pinch of salt. Financial markets are still dominated by the US. There are a lot of financial giants from China now entering but the financial markets are still dominated by the US and Western Europe to some extent,” said Reddy, adding that Singapore, Shanghai and Hong Kong are trying to make inroads.

While China has made a successful entry into the global financial markets what is “most important is that China’s financial giants are driven by the government.”

China, which used to have its sovereign wealth in the US treasury bonds and various financial instruments, has realised in the last 3-4 years and “converted a substantial part of its sovereign wealth and financial instruments into physical infrastructure, though it doesn’t make economic sense to invest sovereign wealth in physical infrastructure.”

Reddy said China wanted “to get out of the clutches of the US dollar dominated money and finance and get non-financial and non-economic advantage geopolitically. These agreements where they have invested in the physical infrastructure are not governed by enforceable international law or transparent laws.”

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